Q+A: How will Japan's National Strategy Bureau function?

TOKYO (Reuters) - Japan’s new government plans to create a powerful new agency to oversee the budget process and set priorities for policy.

Prime Minister Yukio Hatoyama has appointed Deputy Prime Minister Naoto Kan, to head the National Strategy Bureau.

Following are questions and answers about the new bureau being set up by the Democratic Party-led government:

WHY IS THE NEW GOVT CREATING THIS NEW AGENCY?

The Democrats are trying to improve what they view as an inefficient legislative process under the outgoing Liberal Democratic Party (LDP), in which bureaucrats drafted policies for the benefit of their own ministries and lawmakers influenced budget allocations to cater to special interest groups.

The incoming government also wants to centralise authority under Hatoyama and his cabinet, ending haggling between the cabinet and other ruling party lawmakers that typified the LDP’s five decades of rule.

WHAT WILL THE BUREAU DO?

The bureau will set the framework for compiling the budget to meet the policy objectives of the new government. The Democrats want the National Strategy Bureau to instruct the Ministry of Finance how to divide the national budget among Japan’s other ministries.

This is in contrast to the approach under Japan’s previous government, where ministries submitted their budget requests to the finance ministry and negotiated with officials in the ministry’s Budget Bureau.

HOW WILL THE NEW GOVERNMENT STAFF THE BUREAU?

Kan, 62, is a former leader of the Democrats and a former health minister.

His bureau, which will report directly to the prime minister, will include both public sector officials and members of the private sector.

Members of the Keidanren, Japan’s largest business lobby, shouldn’t be represented at the National Strategy Bureau as they are a special interest group, said another senior party figure, Katsuya Okada.

That is a departure from the practice of the former government, which invited the head of Keidanren to join its key economic advisory panels.

WILL KAN HAVE MORE SAY THAN THE FINANCE MINISTER?

It is still unclear which minister will have more authority or which minister’s pronouncements will carry more weight with financial markets, but the finance ministry is likely to maintain control of currency policy.

Renho, vice chair of the Democrats’ policy research committee, was coy on which minister would be more important in an interview with Reuters.

WHAT ARE THE BUREAU’S IMMEDIATE TASKS?

Most likely the first test for the bureau is to carry out the Democrats’ pledge to scrap a record 52.7 trillion yen ($566 billion) ceiling on budget spending set by the outgoing government for the next fiscal year starting in April 2010, and start drafting an annual budget from scratch.

The bureau will also likely have to decide how to redirect some planned spending from a record 14 trillion yen budgeted for stimulus spending in the current fiscal year to March 2010.

The Democrats came to power with ambitious plans to increase household incomes with subsidies and lower taxes.

The National Strategic Bureau may have to soothe investors’ nerves over extra bond issuance as Japan’s public debt is the highest among developed countries at 170 percent of gross domestic product.

Investors are already bracing for at least 5 trillion yen of extra bond issuance this fiscal year simply to make up for a tax revenue shortfall. Anything on top of that could lead to an unwelcome rise in long-term interest rates.

CAN THIS NEW GOVERNMENT AGENCY SUCCEED?

Kan has challenged bureaucrats before when he served as health minister. He exposed a scandal over tainted blood products at his ministry and that experience may help him rein in the bureaucrats in charge of the budget process.

But the finance ministry will have little time to compile the 2010/11 budget before the usual deadline of the end of December.

The outgoing government has already distributed some of the money allocated in its extra budget, and it is uncertain whether the new government can get all that money back.

Hatoyama’s appointment of former leader Ichiro Ozawa as Democrats secretary-general, the party’s No. 2 position, has raised concerns about undue party influence.

Hatoyama has vowed to ensure policies are made and discussed by the cabinet but Ozawa may have clout outside the cabinet as a key strategist who can take much of the credit for the party’s landslide victory. This could undermine the National Strategy Bureau.